Beware the coming storm: cuts will break this coalition

Forget Lords reform and boundary changes. Tories and Liberal Democrats are most likely to fall out over their spending plans

'Tories say that Lords reform is hardly the public’s priority, and that the Lib Dems really want it for party political reasons. Lib Dems can retort that the same is true, with knobs on, for boundary changes.' Illustration by Gillian Blease Guardian

Two points, to start with, most observers can agree on. Looking coldly at the fast-diverging politics of the two coalition parties leads to the near-certain conclusion that this partnership is doomed. But, second, looking closely at the polling leads to an obvious conclusion: from the point of view of both parties, it has to continue because going to the polls now would turn a government pact into a suicide pact.

These two, apparently contradictory, conclusions mark the small and uncomfortable ground the coalition has to camp on through the rest of this summer.

From now until September, when the Commons reassembles, David Cameron's team and Nick Clegg's team will be haggling quietly in private to try to create a compromise on Lords reform that Cameron can sell to his backbenchers. Maybe, after a break to cool tempers and reconnect with the rest of the world, MPs will come back readier to agree.

Frankly, I doubt it. There's a huge gap between the pitiful proposals from Cameron for another tiny step (getting rid of the rest of the hereditaries) and the full-hearted deal agreed by him and Clegg before the Tory revolt. Can Cameron offer enough to get Clegg through his party conference – and actually deliver it? Probably not. Meanwhile, since the Tory rebels are going to spend some of the summer recess with their constituency parties – which are even more hostile to Lib-Demmery than they are – it's unlikely to soften their mood.

What some on both sides of the coalition are calling for now is a renegotiation of the coalition agreement. Talking to one Tory rebel, Adam Afriyie, for Radio 4's Week in Westminster, I was struck by the frustration he finds among Tory constituencies about the existing agreement. He welcomes the ideas springing up among Tory MPs for the party's next manifesto, something that is infuriating the Lib Dems. One Lib Dem complained to me last week that the education secretary, Michael Gove, was riding roughshod over the existing agreement day by day, announcing endless new initiatives without any consultation. It's hardly surprising then that, according to Linda Jack from the Lib Dems' federal policy committee, the leadership has ordered a halt to work on new proposals for a second coalition agreement.

That's undoubtedly because their second-helping agendas are even further apart than their original manifestos. The Lib Dems wanted more focus on the pupil premium, the environment and rights; the Tories on Euro-scepticism and deeper cuts. Although it sounds like tactical sense to try for a renewal of vows halfway through this troubled term, it would only provoke a further two-way tantrum.

Last week, I argued that it would be sensible for the Tories to let the Lords legislation through the Commons, and for the Lib Dems to accept it would probably not become law before the election. I wasn't exactly surprised that they did the opposite. But unless both sides now walk away entirely from their constitutional agendas, this is now likely to end disastrously.

As Sir Menzies Campbell made clear on Sunday, Lib Dems will not walk tamely through the lobbies to get the boundary commission changes that would gain the Tories 15 to 20 extra seats at an election if Lib Dem hopes for Lords reform have just been sunk. He is a cautious, loyal and level-headed figure – his warning is worth dwelling on.

Tories say that Lords reform is hardly the public's priority in the middle of a grim recession, and that the Lib Dems really want it for party political reasons. Lib Dems can retort perfectly easily that the same is true, with knobs on, for boundary commission changes.

Yet if they went through with that threat, it would be devastating for the Conservatives' already fading hopes of a majority government. Far from looking back on the coalition as a period of frustration in office, Tory rebels might find themselves ruefully reflecting from the opposition benches that it was a time of relative potency.

The Institute for Government is right on the button, however, when it says the coalition needs a much clearer and tougher sense of priorities. The original agreement was a laundry list from both sides. Now, in the middle of economic woes, with a big funding crisis looming, laundry lists are ridiculous. Get the big things right, and the rest can be ignored.

So this week, Cameron and Clegg will be shoulder to shoulder again, talking about new infrastructure spending – rail investment – to try to get the economy moving. It will be more piety than hard numbers, one suspects, but at least it's the right subject.

As the Lib Dem blogger Mark Pack has spotted – and the same signals are coming from Tory ministers – the Treasury wants to bring forward the next spending review from 2014 to next year. He calls this the coming storm, and he's right.

Why? Last week the Office for Budget Responsibility argued that another £17bn of cuts or tax rises are needed by 2017 to get public debt back on a sustainable trajectory. Many of us would argue that this is yet another example of the disastrous mishandling of the economy so far, and the utter failure of the money-printing programme from the Bank of England in getting real loans to real companies. But the Tories will argue that, in effect, things have turned out so badly they've got to be made still worse. And the Lib Dems will eye the consequences with total horror. For all the sound and fury recently about Lords reform, it may well be the economy, in the end, that breaks the coalition.